Standing Committee A

[Mr. Nigel Beard in the Chair]

Tax Credits Bill

Clause 33 - Offence of fraud

Amendment moved [this day]: No. 23, in page 21, line 40, at end add— 
'(3) The Secretary of State shall within one year of this section coming into effect and every year thereafter make a report to Parliament on— 
 (a) the extent of fraud in claims for tax credits, and 
 (b) the measures he has taken to deal with fraudulent claims for tax credits.'.—[Mr. Clappison.]

Nigel Beard: I remind the Committee that with this we are debating clause 33 stand part.

James Clappison: I welcome the Paymaster General to our deliberations on this important clause. The Financial Secretary was present for the debate this morning, but we entirely understand that he cannot be in two places at the same time and he has to be in the Chamber to reply to the debate on the Public Accounts Committee. He is not with us, but the Paymaster General is with us instead and they will have liaised on the points that were made this morning. I raised some detailed points to which I did not necessarily expect the Financial Secretary to have answers to at his fingertips and I said that it would be satisfactory if he wrote to me in good time.
 However, some general points remain on which I seek an answer from the Paymaster General. It is apt that she is here for this debate, because she and I have debated the incidence of fraud in the working families tax credit and have corresponded about it in the past. The debate gives me another opportunity to ask her again—I put the same question to the Financial Secretary this morning—how much fraud there is in the tax credit system. 
 That question will not come as a surprise to the Paymaster General, as we have debated the issue in the past. On 11 April 2001 she was good enough to write to me following the debate on the uprating order. I am sure that her memory will not need jogging, but she will remember that last year there was a special uprating order for the working families tax credit because, in addition to the inflation-linked increase in April last year—I was about to say ''miraculously''—somehow the Government also decided to increase the working families tax credit by an additional £5 above inflation in June last year. The Paymaster General will remember speculating about the timing of that increase and how it came about. She will also remember the letter that she wrote to me on 11 April 2001 in which she said: 
''The Inland Revenue are carrying out a benchmarking exercise to establish the level of fraud in tax credit claims. This began in September 2000 and will run for twelve months. The results will be 
used to ensure tax credits compliance work is carried out in the most effective way.''
 The period of 12 months ended in September last year, so we should like to know from the Paymaster General whether, as is presumably the case, that benchmarking exercise has been completed, whether Ministers know the results and whether they plan to put the results in the public domain, so that we all know the extent of fraud in the working families tax credit system according to the Inland Revenue. 
 We also want to know generally what the Government's plans are for tackling fraud, a general point that we raised this morning. We want to know what their plans are for Departments to work together, given that responsibility for these areas has now been fragmented between the Department for Work and Pensions and the Inland Revenue, and also what plans the Government have to work with local government and the private sector in tackling fraud. 
 I also want to ask the Paymaster General a question that was not raised this morning, which I had planned to ask if there had been enough time. Is it planned that the Inland Revenue should participate in the credit industry fraud avoidance system? She may be able to write to me on that rather than answer the question now, but we should like an answer at some stage. 
 We also want to know whether the Government have plans to widen the scope of inquiries into tax credits, something that comes under the Paymaster General's ambit. We understand that the Inland Revenue opened inquiries into 1.5 per cent. of tax credits. How was that figure arrived at as the proportion of tax claims to be investigated? We understand from the Inland Revenue's annual report that 28 per cent. of those inquiries found instances of non-compliance. It would be interesting for the purposes of the debate if the Paymaster General could tell us how many of those cases involved fraud. As we said this morning, we believe that there are too few prosecutions for tax credit fraud. I shall not go over those points again. I am sure that the Paymaster General will be familiar with them anyway, because she has divulged the information to me in written answers. 
 We also want more information about the use of the civil penalty in cases of fraud. In the first two years of working families tax credit 478 penalties were imposed in respect of claims—about 240 each year. Given that penalties can be imposed for negligence as well as fraud, how many were imposed for fraud? We can reasonably expect the Government to have a record of that, and again it would be interesting to have an answer. 
 We seek answers to all those questions because we believe that fraud is an important subject. We do not seek to draw a connection between fraud and anything else. We believe that fraud in itself is bad and we believe that that view is shared by the majority of the public, both taxpayers and recipients of tax credit. We believe that it is in the interests of all of us to take a vigorous approach to tackling fraud. Certainly Opposition Members seek such an approach. We 
 intend to hold the Government to account for what they are doing.

Steve Webb: I have some sympathy with the amendment. I believe that we all agree on the importance of tackling fraud, but in some senses working families tax credit fraud has probably not been approached with the vigour that the Department for Work and Pensions would have us believe it accords to benefit fraud. I would not dream of suggesting that the Treasury is less vigorous in these matters than the DWP, but the DWP issues press releases on this subject roughly weekly, so it must be active. I hope that the Treasury is as well.
 The amendment would require a report in about a year's time on what the Government have been doing on tax credit fraud, which would be welcome. To be fair, the Government have taken one important step on fraud, which is to make an attempt to produce a baseline figure. As the hon. Member for Hertsmere (Mr. Clappison) suggested, that process is proceeding rather slowly; we do not seem to have got there yet. However, given the many decades in which levels of fraud were not even measured accurately, so that we could tell whether we were making progress, at least we seem to be making some headway. 
 The hon. Gentleman mentioned an aspect of tax credit fraud which, as he rightly said, I had raised in a written question to the Paymaster General. At that stage she could not give me an assessment of child care tax credit fraud, but is she aware of the relatively recent reports that suggest that child care providers are getting fed up? The scam appears to be that parents who know how to work the system book a child care place for six months or a year, get the provider's signature on the tax credit form, send the form in, get the child care tax credit for a six-month fixed period under the present regime and then do not turn up. The providers are being messed around quite badly and are feeling aggrieved. I suspect that if they had been aware of the child care tax credit fraud hotline, to which our attention was drawn this morning, they might have rung it, but I also suspect that many of them are not aware of it or simply do not bother. Clearly that is both fraudulent as regards the public purse and disruptive for child care providers. What spot checks are undertaken by the Treasury once an award has been made and will they be any more vigorous under the new regime of working tax credits and child care tax credits. 
 I give the Government some credit for trying to assess the extent of fraud in various parts of the system, although they have not quite got there in relation to tax credits. An annual report of the sort envisaged in the amendment would be a useful prompt and would apply a little more pressure. That would be welcome.

Howard Flight: As we are also debating clause 33 stand part, I want to raise the wider point of concern that the Bill will lead to a great deal more fraud and questionable behaviour. I do not intend to repeat the formidable arguments advanced by the right hon. Member for
 Birkenhead (Mr. Field) on Second Reading, which I am sure that he will repeat on Report and Third Reading. I hope that there will be more opportunity to comment on the subject in relation to new clause 13.
 We have learned and understood that in the interests of continuity several requirements in the administration of tax credits will be relatively fuzzy. The Financial Secretary told us that he sees the complexities as being analogous to those of a television, in that people will be able to switch on their entitlements without understanding how the system works. However, it has been a sound tradition of Anglo-Saxon law to try to achieve maximum legal clarity so that people know whether they are on the right or the wrong side of the law. As the Paymaster General will know, I have on many occasions argued against the dangers of bracketing or muddling together tax evasion and tax avoidance. Where that has happened in continental Europe, notably in Germany, it has led to widespread social condoning of tax evasion. That is why the Germans wanted the withholding tax. 
 There are grey areas in the Bill. For example, it is not clear whether overpayments will be refunded or to what extent the Inland Revenue will be able to be more rule-driven about people's entitlements, and people will not be required to undertake formal reporting of their circumstances. I fear that that will lead to the kind of fuzziness that leads people to condone actions that are not wanton fraud but are slightly over the line. That is apart from the possibilities for fraudulent collusion between employers and employees that worry the right hon. Member for Birkenhead. We risk encouraging such behaviour if we try to make arrangements that are not too onerous for claimants who may not want to—or even be able to—deal with a more demanding regime. 
 That brings me back to negligence and fraud. For the reasons that were given, I agree that it is wrong to bracket the two. Apart from the danger that claimants will not really know what they are entitled to, as people learn the ropes they will develop bad habits. They will find out what the Revenue does not check or investigate and develop wheezes such as the child care providers wheeze described by the hon. Member for Northavon. The machinery needs to be much tighter. Perhaps this is only a framework Bill providing for various regulations that will ultimately achieve that. However, the explanations of the Government's intentions that we have heard so far have led me to catch a nasty case of unease from my hon. Friend the Member for Hertsmere. 
 The practices that may develop are not of a wickedly fraudulent nature or liable to send their perpetrators to prison, but wheezes that are wrong in themselves, cost the taxpayer a lot of money and lead to further clouding of the sound Anglo-Saxon approach of precision regarding what is within or not within the law.

Hugo Swire: This is a good clause, and we owe it to the Bill and to the taxpayer to spend some time on it. I welcome the Paymaster
 General to the Committee. She should not be held responsible for the observations of a colleague, especially as she was not in the Room, but the Financial Secretary accused Conservative Members of indulging in gesture legislation. That is not what we are doing, and I regret that he took that view. It would be a dereliction of our duty and a disservice to the taxpayer were we not to examine the provision very carefully.
 I do not want to spend the entire sitting quoting the comments of the right hon. Member for Birkenhead, but given his great knowledge of the subject—no doubt he will have plenty more to say on Report—it is worth going over some of his concerns about tax credits. He said: 
''It would be difficult to operate this system honestly in the Garden of Eden, let alone the real world.''
 He went on to estimate that the level of fraud against tax credits is at least as high as that against conventional welfare payments such as housing benefit, which currently runs at about 70 per cent. Perhaps regrettably, we inhabit the real world, not the garden of Eden, so that was a pertinent comment. 
 I grant that no Government should be put off their legislative programme because of the possibility of fraud. That would be utterly ridiculous. However, in instigating new legislation they have a duty to ensure as far as they can that fraud is not an option, or at least not a welcome option. The thought of the Garden of Eden and the temptation to err reminds me of an incident from my days in the armed services, when I had some money removed from my room in the barracks where I was stationed. The miscreant was apprehended and suitably punished, but I was punished with equal vigour on the grounds that I had put temptation in his way. I did not see the justice in that, but having had time to reflect in the intervening 20 years I can accept that it had some logic, even if it was a little warped. It was a salutary lesson. 
 When the working families tax credit and the disabled person's tax credit were first introduced, questions were asked about the scope that they presented for fraudulent claims. Again, I must refer back to the right hon. Member for Birkenhead, who was instructed by the Prime Minister to go away and think the unthinkable on the whole area of welfare reform. He took him at his word and was summarily dismissed, which makes one suspect that the best policy for advancement in the Labour party is not to think at all. In 1998, he warned that 
''the whole of the family tax credit venture is fraught with great dangers. It offers huge bonuses for dishonesty. It strengthens the employer's hold over working people—'these are the conditions: cheat and both of us will be better off.' It thereby pulls employers into a spider's web of dishonesty and corruption. It rewards employers paying low wages. It takes the pressure off improving productivity and thereby the scope of increasing real wages.''
 My hon. Friends the Members for Arundel and South Downs (Mr. Flight) and for Hertsmere have argued well that a distinction should be drawn between those who commit deliberate fraud and those who do so inadvertently. Although we touched on that issue in previous sittings, I would welcome the 
 Paymaster General's thoughts on it. We should also remember the story of individual learning accounts, to which reference was made this morning. They raised the hopes and aspirations of those who subscribed to them—many such people were my constituents—only to be dashed when the entire system was withdrawn because of fraud. We therefore owe it to the taxpayer and to our constituents to ensure that the Bill will stand the test of time. 
 On benefits, it is perhaps worth considering the experience of other countries. In Canada, the extent of fraud in the working income supplement, or WIS, was so great that it is returning to a benefits-based system. Lessons might also be learned from the United States, where the earned income tax credit has led to tremendous problems with fraud. An Internal Revenue Service study of tax compliance, published in early 1997, found that taxpayers claimed $4.4 billion more in earned income tax credit refunds than they were eligible to receive. Between 1986 and 1996, federal spending on earned income tax credits increased from $1.7 billion to $18 billion, leading The Economist to state in 1995: 
''There is no longer consensus that the ETIC is a sensible addition to America's anti-poverty programmes.''
 Yet, as has been said, one of the main tenets of such legislation is to combat poverty. 
 Applicants for the working families tax credit and the disabled person's tax credit are asked to provide documentary proof of earnings. Where they are unable to do so, employers are asked to provide such details. However, in line with efforts to encourage electronic applications, to which the Paymaster General referred in a previous sitting, claimants for the new tax credits will not be asked to provide documentary proof of income with their application, although the Inland Revenue will reserve the right to check the information provided by consulting them or their employers. According to the Government, that 
''will remove the need for the Revenue routinely to contact employers for proof of an employee's earnings.''

Mark Hoban: Does my hon. Friend agree that the risk with such legislation is that those who try to commit fraud and are challenged by the Inland Revenue to produce documentary evidence will be able to say, ''Oh, it was a mistake''? Removing the requirement to produce documentary evidence at the outset will enable more people to claim that they made an honest mistake.

Hugo Swire: My hon. Friend is entirely right, and I hope that he will return to that point in his speech.
 Because of the Government's determination to pay tax credits through the payroll, the Inland Revenue administers them. As I understand it, they are therefore not subject to the new powers in the Social Security Fraud Act 2001, which aims to reduce the cost of welfare fraud. In introducing the Bill, it should be the Government's aspiration not only to increase benefits to those who need them most, but to reduce the amount of welfare fraud. As the hon. Member for Regent's Park and Kensington, North (Ms Buck) pointed out, to do so would ostensibly release more 
 funds to those who need them—an aspiration with which we can all concur. 
 This perceived inconsistency was highlighted during consideration of the Social Security Fraud Bill. However, the Government affirm that such payments are tax credits and, as such, cannot be aligned with other welfare benefits. 
 This morning, my hon. Friend the Member for Hertsmere questioned the Revenue's target of investigating 1.5 per cent. of applications per tax credit. I mentioned that subject on Tuesday morning, and asked the Paymaster General how that figure was arrived at. She replied that we were dealing with a different clause, but that we would doubtless return to the matter. We have, and I hope that she will enlighten us as to whether that figure was calculated, or is an arbitrary one plucked from the air. 
 This morning, the Financial Secretary talked about activity on the ground in pursuing those who abuse the system, and said that the commissioners would not hesitate to prosecute. More worryingly, he also said that the more substantial the fraud, the more likely the board's wish to prosecute. We all live in the real world—as I have said, we do not inhabit the Garden of Eden—but I should be extremely worried to discover that only those who make the headlines will be prosecuted, and that the intention is to go after only the big fish. The Financial Secretary suggested that this issue is related to the Conservative party's so-called new image, but that has nothing to do with it. It is a matter of common decency that everyone be equal under the law. Those who commit fraud, of whatever degree—

Dawn Primarolo: While the hon. Gentleman is on his feet, can he say whether the principle that he is outlining should also apply to the 26 million taxpayers? Rather large numbers of them occasionally make errors, and some find new wheezes to avoid paying the amount of tax that they should.

Hugo Swire: Indeed. The Paymaster General will know better than I do that people who avoid paying tax due are committing a crime.

Howard Flight: Evading.

Hugo Swire: Exactly. The Paymaster General will doubtless wish to return to my valid point—my hon. Friends the Members for Arundel and South Downs and for Hertsmere also made it—about those who commit fraud through deliberate deceit, and those who do so inadvertently because of the complexity, to which I referred on Tuesday morning, of legislation such as this. The amendment argues for a stronger deterrent to protect people. We are talking not about a magic sum that the Government are handing out in a gesture of selfless kindness, but about taxpayer's money that will be taken out of one pot and put into another. As I said at the beginning of this debate, it would be a dereliction of our duty were we not to do everything in our power to ensure that fraud is kept to an absolute minimum, and that those who deliberately
 perpetrate fraud are penalised to the absolute maximum.

Mark Hoban: Having been tempted by my hon. Friend the Member for East Devon (Mr. Swire) into speaking to this important part of the Bill, I do not wish to disappoint him. I want to talk relatively briefly about two issues related to fraud: the opportunity for connivance between employers and employees in committing fraud, and the extent to which the Bill's complexity might encourage people to commit fraud.
 Connivance between employer and employee is an issue that has been raised on several occasions, and in that context I want to touch particularly on the thresholds for the notification of claims for reassessment. I am especially concerned about the threshold when salaries or incomes go up, not when they come down. Depending on how wide the threshold for notification of upward changes is, I wonder whether employers might be encouraged to strike a deal with employees, whereby pay rises will not go above the threshold so that the tax credit recipient will not have their tax credit reduced. From year to year, we might see employers restrict pay increases in line with their employees' wishes to such an extent that employees do not have to go through reassessment. Yes, they will be reassessed at the start of the next tax year, as was said in the debate last week.

Dawn Primarolo: Will the hon. Gentleman help the Committee by describing how the situation to which he referred will take place without showing itself in national insurance or tax returns, in an employment situation where the returns for all employees are going to the Inland Revenue, information is held on national insurance and tax, and the employer agrees, as many do, the rate paid with their employees? The employer would be inveigled in a very serious series of frauds.

Mark Hoban: It is not beyond the imagination of anyone who has been involved in business to envisage a situation in which the declared income of an employee could go up, which could be reflected in the returns, but in which that increase had been restricted so as not to go above the threshold. That would not be committing serious fraud. It would be the employer and the employee manipulating the system together. That is especially likely to happen in small businesses where wage arrangements are dealt with on an individual basis, rather than with large employers, where rate is often agreed with trade unions or employee representatives. In the small business sector, where things are much closer and tighter, such discussions might take place between employees and employers.

Dawn Primarolo: So the employer would be committing another offence under the Bill, putting an employee under pressure to collude in misrepresenting the returns on payment made to the employee, by deliberately manipulating the system.

Mark Hoban: We are talking about the way in which the thresholds could be exploited by employers or employees to achieve a better outcome. It is not unrealistic to think that connivance between employers and employees could happen, in the same
 way that cash payments can be made by the agreement of both parties. It is possible that connivance might take place and that that might be fraud.

Howard Flight: Is the circumstance that my hon. Friend has in mind a small business in which there is a discussion, leading to an understanding that pay will go up by, for example, 6 per cent., but because the threshold kicks in at, say, 2 per cent., the employer says, ''OK, we'll go on paying 2 per cent., and, when we're out of the tax year, you can have a bonus equal to the difference.''? That sort of collusion may or may not fall within an offence under the Bill, but people certainly will not think that it does. It will eventually kick in in the next year, but it is the sort of bad habit to which I was endeavouring to refer earlier.

Mark Hoban: I am grateful to my hon. Friend for that example, which is the sort of thing I have in mind. People might use the system in such ways to manipulate the terms and conditions of employees to the mutual satisfaction of both parties to the transaction.
 That leads on to my next point, which is that the complexity of the system could give rise to behavioural changes. The Green Paper, ''Beating Fraud is Everyone's Business: Securing the Future'', said that complex rules make a great contribution to the occurrence of fraud. It stated: 
''The detailed rules governing benefit entitlement, and contribution conditions, may also encourage behaviour which is fraudulent.''
 The Green Paper identified three rules from which most fraud stems. They are: 
''the rule that reduces income-related benefits when earnings cross a low weekly threshold; the rule that means that two people declaring that they live together as a couple receive less benefit than two who pretend that they live alone; and the rule that reduces income-related benefits where a person's financial capital exceeds £3,000.''
 The latter point has been dealt with, in that the tax credit is based on investment income earned rather than on notional capital level, but the first two still apply in this situation. It will be interesting to see in the rules on benefit rates on the working tax credit in the Budget what the advantage and disadvantage will be for people declaring that they live alone or together. Comment has also been made on the type of event that gives rise to fraud in other benefits. Cohabitation, or failure to present that one is cohabiting, was a major cause of fraud in other benefits. 
 I am concerned that the complexity of the system may drive people to fraud either of their own volition or inadvertently. There are issues with processing delays. In my surgery, I have dealt with people who have put in a form for a benefit, and it has come back with a query, or more evidence is asked for. Such delays arise from the complexity of the system and people's failure to understand the rules and they encourage people to do such things as start work and not declare that they have changed their work status from unemployed to employed. 
 People working variable hours and in receipt of the 30-hour premium may, if they slip below 30 hours, fail to declare that their hours have fallen. That could be treated as fraud but, equally, could be classified as inadvertent error. People might not have been aware 
 of the complex rules around the hours and what would happen were their hours above or below 30 a week. Complexity will give rise to the opportunity for deliberate and inadvertent fraud against the Inland Revenue.

James Clappison: My hon. Friend is making an extremely valuable point about complexity. Does he agree that, on top of that, constantly changing rules are another source of non-compliance, if not fraud?

Mark Hoban: Indeed. My hon. Friend makes a very good point. This is a flagship reform, two years after the first legislation was implemented. The rate of change in this area will, I think, confuse enormously claimants and those administering the benefit. The transfer of responsibility from the DWP to the Inland Revenue may also create an atmosphere of confusion and bewilderment for those receiving and those administering the benefits.
 Confusion and bewilderment could provide a smokescreen for the deliberate fraudster. I raised a point with my hon. Friend the Member for East Devon earlier about people submitting income data to the Inland Revenue without any documentary evidence and saying, when challenged, that they were sorry, they got the numbers wrong. Such situations will arise when people can exploit the rules. Fraudsters might say, ''That was an honest mistake, Guv, it's a fair cop'', when in fact it was a determined effort to defraud the Inland Revenue and the taxpayer of tax credits and taxpayers' money. 
 I am concerned about the complexity of the Bill and the fact that it could allow employers and employees to connive in a way that is against taxpayers' interests. We should all take fraud seriously. When I read the answer that the Minister gave to my hon. Friend the Member for Hertsmere, it disturbed me to discover that of 52,000 investigations into the working families tax credit over two years, 8,800 led to recovery and of those, there were only 22 prosecutions, 13 of which were successful. Is it clear in the message that is going out to those who claim tax credits that fraud is against the law and that the Government will clamp down on it? That message does not seem to be coming out clearly, and, referring back to the Green Paper on fraud, the Bill provides an opportunity for people to commit fraud deliberately or inadvertently.

Dawn Primarolo: I welcome you to the Chair, Mr. Beard, and apologise that I was not able to be here this morning to hear the first part of what is proving to be an interesting and important debate. My right hon. Friend the Financial Secretary gave me a full briefing on points raised. He is now detained on Government business on the Floor of the House.
 I will briefly explain how the Government are approaching the question of compliance, and put it in perspective. I should not like to accuse the hon. Member for East Devon of gesture politics—well, not at the moment anyway—because I am sure that he would not accuse the Government of the same; I will return to his points. 
 When ensuring the smooth working of the tax credit system, as with the working families tax credit, it is important to detect early, and prevent, abuses that 
 may arise in the system. We do not pride ourselves on how many hundreds and thousands of our citizens we can take to court, even having failed to prosecute. A balance must be struck between ensuring that applications for tax credits are submitted correctly, and being able to identify errors, deliberate or mistaken, and correct them early on. That will be a deterrent in itself. Opposition Members talked about people learning of wheezes—they certainly do so in the tax system. However, I fail to see the point about those who seek to pay less tax than they know they should. I do not think that it is yet the policy of Her Majesty's Opposition to increase our prison population to prove the point about putting in one's correct return. 
Mr. Flight rose—

Dawn Primarolo: I shall give way to the hon. Gentleman, but I can give him examples of big wheezes, with which he would not be unfamiliar because of the sector with which he was once more closely associated.

Howard Flight: Let me repeat my point. For better or worse, in the payment of taxation, there is a fundamental difference between tax evasion and tax avoidance—one is within the law, one is without. The Government do their best to counter tax avoidance with various measures; we have debated them in this Room on many occasions. Under the system of income tax, there are obligations to complete tax returns and to provide other information that the Inland Revenue needs. That is as well ordered as it can be. Under the tax credit system, parallel disciplines do not exist and, as I explained, the way in which it will operate will not be understood by people in the way that our tax system is now readily understood, although it has become complicated.
 The Paymaster General rightly points out that wheezes will develop all over the place. I hope that she will accept my point in the spirit in which it is meant, but under the system outlined for tax credits, there is a greater propensity for wheezes to develop that are not within the law.

Dawn Primarolo: I shall address the points about the way in which the tax credit system will operate and how, at every point, the Revenue's duty is to ensure that the applications that it receives are correct. I shall not deal with the difference between evasion and avoidance, except to say that I do not believe that the line is as clear as the hon. Member for Arundel and South Downs suggests. Parliament's intent is clear when it says that the upper rate of tax on income is 40 per cent., and those who juggle with that know that intent full well. However, that is not a matter for the Committee and I should return to the amendments, because hon. Members have raised a number of important points.
 I share with Opposition Members the view that the Government must be committed to tackling fraud and non-compliance and I do not dispute that we need an approach that deals with that issue. We are considering the approach that the Government 
 believe is most effective, which, as my hon. Friend the Member for Regent's Park and Kensington, North and other members of the Committee have said, must be proportionate. It has become a mantra in the Committee to talk about the need to strike a balance between enforcing obligations effectively and encouraging people to obtain entitlements. The Bill provides a route to balance those two objectives. 
 Before I deal with the new powers introduced by the Bill and the points raised by hon. Gentlemen, I will point out some of the structural changes that the new tax credit will bring about that will make the delivery system more secure. The first is the measure of income to be used. Income for the tax year, defined much more closely in line with tax, will reduce the scope for understating income and make it easier to cross check income figures with tax records and the information held by the Inland Revenue. Understatement of income is the most common abuse at present when a claim is found to be incorrect. Our experience teaches us that and we know how to deal with it. 
 The second point is one that exercised the hon. Member for Northavon (Mr. Webb) in particular. It relates to the nature of the new tax credits and their ability to respond to changes as they happen. As he said, support for child care costs needs to be matched more closely to actual costs. At present support for child care depends on the position when the claim is made. Once the child tax credit award has been made, it stays in place for six months. That is an important structural point that we needed to address. The hon. Gentleman also mentioned a matter that has been raised by the National Childminding Association and some private nurseries, which was that parents may register and take a place at the time of application, stay for a few weeks and then, when the payments are securely in place, remove their child from the facility. 
 Although we have had a great deal of anecdotal evidence of that happening, it emerged from the work that we did on this issue that, first, we needed to make it much clearer to child care providers what they were signing the form to indicate. That required us to give more business advice, which we have done, and much more support, so that child care providers understood what that meant, because many of them thought that they would receive the money direct. 
 Secondly, when we undertook spot checks to investigate cases, we found not that some children had moved when they should not have done, but that parents had moved their children to other providers whom we would still have recognised and paid for. None the less, there was a problem that niggled away, so we said that entitlement to the child care element would stop immediately the qualifying child care was no longer provided and we would put in place spot checks to ensure that that was done. Again, the information that we are collecting enables us to do that. 
 When we have constructed the compliance requirements, we cross check at every level to ensure that we are dealing with cases where the fraud is systematic, organised and, in some cases, a criminal activity. When we prosecute, we want to ensure that we are successful with the prosecution, because that is 
 the biggest deterrent. The other deterrent is that if people try to defraud the system, are caught and do not get the money, they will realise in the end that it is not as simple as they thought. 
 As we said in earlier debates, we shall also aim to make direct payments of tax credit straight into bank accounts wherever possible, to reduce the scope for fraud with other methods of payment. Fraud is occurring with giro payments: they do not reach the person they should reach, for whatever reason. Such payments are cashed into the system with different values and, because the order books are issued with several payments in them, the scope for fraud is large. We have also discussed in the Committee the need for sensitivity in dealing with that issue, but secure payment is another means of reducing the opportunities to use the money in ways that were not intended. 
 What approach does the Bill take to tackle non-compliance? In framing the compliance regime, we have carefully considered the framework, the terms, the levels of penalties and the circumstances in which they would be levied, the approach to fraud and the powers that the Inland Revenue needs. Where necessary, the Bill extends those powers beyond what is currently available. Therefore, the clause introduces a new offence of tax credit fraud and clause 34 extends the Inland Revenue's powers when investigating cases. 
 The Bill is designed to allow the Revenue to take an integrated approach to its tax and tax credit compliance work, using a co-ordinated set of powers to carry out effective checks and to eradicate errors, negligence—whatever we call it—or fraud on a level that can be dealt with, where the person no longer commits the fraud and is now complying. The hon. Member for Arundel and South Downs touched on that, when he implied that if we allowed too many wheezes to take place, it was a challenge to our citizens to find ways to evade the law. I do not necessarily accept that proposition, but in designing the system we have ensured that such opportunities are as limited as possible. We do not want people who claim the new tax credits to be fearful when they apply that a simple error, or even something that they would not have done but for tragic circumstances in their families, will bring the entire force of the Inland Revenue down on them. The balance that we must strike is between effectiveness and deterrence and dealing with fraud where we find it.

James Clappison: In the light of that comment by the Paymaster General, will she reconsider the provisions that bracket negligence and fraud for the purposes of attracting a civil penalty?

Dawn Primarolo: I shall deal with that issue in a moment.

Howard Flight: We objected to it.

Dawn Primarolo: The Opposition's approach to the Bill is confusing. They claim that they want a system that is secure and that reduces opportunities for negligent or fraudulent behaviour, but they would cut back the powers on, for example, our ability to deal with such behaviour with employers and to increase the powers against claimants.

James Clappison: Will the Paymaster General give way?

Dawn Primarolo: The hon. Gentleman must focus on whether he wants me to answer the questions that he has already asked or whether I should leave those to one side and debate with him now; I am happy to do either.

James Clappison: I am waiting with bated breath for answers to my questions.

Dawn Primarolo: There is no need to be unpleasant.

James Clappison: I understand that the Paymaster General wants to make her case and I am listening to it. I assure her that there is nothing in our amendments that would remove or reduce the powers to deal with fraud, whether an employer, a claimant or anyone else commits it.

Dawn Primarolo: Up-front checks into claims will be carried out to combat fraud. The automated system and data sources available to the Inland Revenue will enable it to use systematic risk assessments and screening techniques. Those changes will enable the cases that carry the greatest risk to be identified before payments are made. For fraud to be committed there must be intent and receipt of resources, we can prevent it by ensuring that people receive their fair entitlement. The Inland Revenue will be able to carry out further checks by using the powers provided in clauses 14 or 15 to ask for additional information or supporting evidence from the claimant before deciding whether to turn an award into payment.
 The Revenue will carry out up-front checks on all claims. The initial automated risk assessment will identify those applications that present a high risk of non-compliance or fraud and therefore merit immediate consideration. These will be directed for immediate consideration to staff in one of the Revenue's research, intelligence and analysis teams. I am sure that hon. Members do not expect me to tell them and all those who look for wheezes exactly what our risk assessment is and how we will identify such applications. I shall try to give a broad indication, but the assessment becomes useless if it is known. The risk weighting used in the up-front screening process will be capable of being varied either centrally or locally in response to various factors such as changing perceptions of risk, which means that there is a risk assessment of our risk assessment. 
 The research, intelligence and analysis teams will also have access to third-party information and data from other sources such as self-assessment, and those will be available to assist them in identifying cases. Of course, we have national insurance returns from employers, so we can identify the type of risks to which the hon. Member for Fareham (Mr. Hoban) referred. Only a tiny percentage of employers may be tempted to think that they can make arrangements to depress wages or to operate some other form of wheeze, as it was described. 
 Data from all claims will be passed to a database, and will be subject to further profiling to select cases for inquiry. The Revenue will also carry out in-year 
 compliance work, which will identify cases where it merely suspects that an award is incorrect, even though it in fact established that such an award was incorrect. In such cases, further investigation might be required, just as apparently suspect claims will be subject to further investigation, as described in clause 14. Clause 16 therefore enables the Revenue to require information and evidence to help it decide whether there are reasonable grounds for amending or revoking an award, thus allowing it to take effective action during the year to prevent tax credits from being paid incorrectly. 
 Clause 18 will allow the board to carry out inquiries into awards after the end of a year. It will enable the Inland Revenue to implement an effective end of year compliance regime by empowering it to investigate awards and ensure that they are correct, and to amend or revoke them where they are not. The powers build on those already available during the year under clauses 14 and 16. The Revenue will also be empowered to require information and evidence from any person to whom an award has been made, provided that an inquiry has been initiated. The Revenue may obtain information from third parties—for example, banks—in accordance with regulations made under the clauses. 
 Before I move on to the specific points that were made about fraud, I want to stress that the system in the Revenue and the information that we have enables us to undertake all such work, and to assist in ensuring that the overwhelming majority of claims are correct. There are all manner of reasons for wanting to do that, not the least of which is that we do not want claimants to get to the end of the year and find that, for whatever reason, that they have been overpaid. Indeed, we have discussed that issue before. 
 Those are not the only powers, however, that will enable the Revenue to investigate fraud. The provisions that will empower the Revenue to tackle criminal fraud are contained in clause 34, and clause 33 creates the new offence. The most serious cases of fraud will be considered for criminal investigation and prosecution by the special compliance office. The cases pursued will be those where the applicant's actions are particularly offensive, including the use of false documents, repeated offending, collusion on the part of employers, or organised fraud by criminal gangs. A case that falls within the criteria, is considered for prosecution but does not proceed for one reason or another—for example, where it cannot meet the requirements for legal prosecution—will return to the compliance teams. The other powers for penalising the claim can then be considered. No case of suspected fraud should escape investigation entirely. That mirrors the approach to tax fraud, where similar considerations apply in deciding cases for prosecution. Interestingly, I do not recall that the hon. Member for Hertsmere had any objections to the provisions on negligence and fraud in last year's Finance Bill. 
 The Committee heard a great deal this morning about the work that the Revenue can do and how we can move through our prosecutions. I have also said 
 that the most serious cases will go forward for prosecution. 
 I want to deal with the hon. Member for Hertsmere's points about the number of cases and benchmarking.

Howard Flight: I do not want to add more points, but I would like to sum up and repeat a point that I made at the beginning of our deliberations. The Paymaster General says that the Inland Revenue has greater powers in terms of inquiry and discretion than was the case with the former Department of Social Security and the old benefit regime, and that that is an important element in changing the administration from the DSS to the Inland Revenue.

Dawn Primarolo: It is true that the Inland Revenue has greater powers in terms of investigation for fraud and negligence than, with the exception of Customs and Excise, any other department.

Howard Flight: I spoke about both powers and discretion in terms of how to respond and whether to make payments.

Dawn Primarolo: I want to be careful with the question of discretion because it is a specific term. The Inland Revenue must follow the procedures that are laid down in the Bill, and it has no discretion to vary those powers. However, if by discretion the hon. Gentleman means that, on the first assessment of an application that clearly contains something that is incorrect the official concerned should return the form or make inquires, they have the discretion to move the form on although it may be incorrect.
 We would monitor where there were repeated errors of a similar type. One offence that would make an application high risk over a period of time would be where there was repeated concealment that was discovered and corrected, and it happened again. That might trigger a further investigation. As I understand it—I shall double check this—there is no discretion for the Inland Revenue to say that it will not proceed to an investigation if the criteria are met. Prosecution is a matter of evidence being sufficient and the legal advice being the same as that which the Crown Prosecution Service would apply with regard to the use of public courts. I am uneasy about using the word ''discretion'' because it has a specific meaning in this area. If the hon. Gentleman will forgive me, that is something at which I shall look more closely. 
 The most serious cases go forward for consideration for prosecution, and I can update the figures. Prosecution orders have been issued in 40 cases of which 22 have been concluded. A further 100 cases are in the process of consideration, preparation and investigation. Of the cases that have been concluded, custodial sentences have been imposed in five, and they range from three months to two and a half years. Non-custodial sentences were applied in the other cases. I cannot tell the hon. Gentleman how many people were involved in each case. He will understand that we are looking at cases where there is a systematic number of people. I do not accept that the policy that we are operating is not working. In serious cases, a custodial sentence has a far greater effect than going to court and getting away with it, or a conditional discharge. 
 I shall now deal with some specific points that have been made during today's sittings. I have an example that sheds some light on our belief that an increase in the maximum penalties is unnecessary. One of the most serious cases of tax fraud in recent years was when, in February 2001, a tax barrister was found guilty of cheating against the public purse. I remind hon. Members that, as well as the provisions within the Bill, it is also possible to take a case where the custodial sentence is unlimited, or limited by the courts' discretion. Such a case is called cheating against the public purse. That would apply here. 
 On the range of criteria we are considering for serious cases, I can give a list of the criteria used when deciding whether to prosecute. They are deliberate concealment or deception; false or forged documents; certificates, statements or claims prepared with the intention to deceive; conspiracy; corruption; a second or subsequent serious offence; additional books or records for accounting tax contribution or other tax credit purposes prepared or used with the intention to deceive; organised or systematic fraud against tax contributions or the tax credit system; unusual frauds of novelty or ingenuity—that is a very interesting category; theft or misuse of Inland Revenue documents; and assaults on, threats to or impersonation of Inland Revenue officials. Clearly, that is an impressive range. The Inland Revenue's care and management power in securing the collection of tax demonstrates its wide experience and expertise in ensuring that it manages the system well. 
 The hon. Members for East Devon and for Fareham both mentioned the collusion of employees. I think that I have dealt with that in terms of examining other types of information such as the profiles of companies. The Inland Revenue also policies the national minimum wage. We have quite a lot of information that we can use. The Bill provides for information gateways to relevant Government Departments to ensure that we can use subsequent information to establish the facts, if we need to. That is dealt with carefully in the Bill. 
 Another issue is requests for information from claimants by the Inland Revenue. The hon. Member for East Devon mentioned that. Additional information that we might ask for includes bank statements, passbooks, payslips or receipts. That would be the sort of information we might ask for once we were investigating because we suspected someone. 
 The hon. Gentleman also referred to the experience of other countries. Canada's experience has led it to come back and design a system that is now very similar to ours. The United States has an interesting system, but ours is very different from it. The level at which payment is made and the way in which the system buttresses the Government's overall strategy in tackling poverty makes it different. France and Germany have been interested in our tax credit system because of its effectiveness to date. We have had much discussion with them about it, and we have given them a lot of information and support. 
 The hon. Member for Hertsmere mentioned 1.5 per cent., a figure that the hon. Member for East Devon also used. In explaining how the process works, I have tried to show that we do not set a percentage. Instead, we rigorously assess what is happening at every point and ensure that that is correct. 
 The hon. Member for Hertsmere mentioned data sharing.

James Clappison: I have other questions to ask about the 1.5 per cent. I presume that 1.5 per cent. relates to the number of inquiries generated by the system of risk assessment that the Paymaster General took us through earlier. The figure of 1.5 per cent. that I was quoting, however, came from the Inland Revenue's annual report, which said—I can find the document if she wishes—that it was the Inland Revenue's aim in its first year to undertake inquiries into 1.5 per cent. of applications. That figure came from the Inland Revenue itself.

Dawn Primarolo: I must be honest and say that, in my opinion, the figure of 1.5 per cent. is not necessarily a good guide to the system that I have described. I might need to look specifically at what that figure referred to, and I am happy to come back to the hon. Gentleman on it.

James Clappison: Can I assist the Paymaster General?

Dawn Primarolo: Well, the hon. Gentleman can, but I shall still be unable to answer further.

James Clappison: I think that it would assist the Paymaster General if I quoted from the Inland Revenue's annual report, which said, under ''Specialist Activities, Tax Credits'':
''During our first full year, our aim was to open enquiries into 1.5 per cent. of applications.''

Dawn Primarolo: I suggested to the hon. Gentleman that I should examine that to make sure that we were talking about exactly the same thing because we are aware of high-risk areas because of the information that we hold. I referred to that at the beginning of my remarks. Those areas have our attention from the very beginning, whereas a compliance system operates for the vast majority. Unfortunately, it is necessary to give a certain profile of application more intense consideration from the very beginning. Before saying anything further in Committee, I wanted to check whether that 1.5 per cent. was referring to what we consider to be high-risk applications, which we would therefore already be looking at closely, as opposed to those of any risk, across the whole tax credit population. Given what I have described, I think that the hon. Gentleman will appreciate that 1.5 per cent. is not the only figure with which we are concerned.
 On data sharing, hon. Members will know that there are strict legal obligations to maintain the confidentiality of the information that the Inland Revenue holds. I know that it is important that I assure the Committee as far as possible that the right processes are in place for fraud, but I am somewhat constrained. I should like to be able to give some examples, but unfortunately I am not permitted to do 
 so. I am sure that members of the Committee will understand why. 
 In the past, restrictions were a little tighter than was necessary, which hindered criminal investigations and prosecutions. That is why the Anti-Terrorism, Crime and Security Act 2001 provides additional gateways. The Bill will allow the Inland Revenue to disclose information for the purpose of assisting criminal investigations or proceedings, including where such proceedings should be brought to an end. Schedule 5 provides for sharing information with certain other Departments to achieve that. 
 On the benchmarking report, I told the hon. Member for Hertsmere that the Inland Revenue are considering the details and a report will come to me. It is already using that information to inform people about the new provisions. I cannot give him a guarantee that I will be able to publish that information because it deals with specifics of possible frauds that it would be unwise to put in the public domain. However, I will consider how to ensure that he is properly informed so that he can discharge his parliamentary duties. 
 The hon. Gentleman asked about the hotline. I do not have that information to hand, so I shall write to him. In respect of progress since the Scampion report, I dealt with some of his points about co-operation on pursuing other kinds of frauds. 
 I have tried to cover the full range of methods that are available to the Inland Revenue in dealing with fraud. Those powers are proportionate, but it is a question of balance. As I said to my hon. Friend the Member for Regent's Park and Kensington, North, the regime must not deter people. The vast majority of claimants are law-abiding in seeking their entitlements. I hope that members of the Committee will agree that the arrangements in the Bill are satisfactory and that the amendment is unnecessary. If the hon. Gentleman feels that he must press it to a vote, I shall have to ask my hon. Friends to oppose it.

James Clappison: I can make common ground with the Paymaster General to the extent that this has been an important debate on an important subject. I thank her for her considered response, but I remain far from satisfied with some of her answers. I am grateful to my hon. Friends for their well-informed comments, which echo those made by many others, and to the hon. Member for Northavon for his remarks about the amendment. I think that most members of the public would also welcome such a mechanism.
 We have achieved a measure of consensus. We all want to see fraud tackled; that is in everyone's interests, claimants as well as members of the public. I quote from the Chancellor's response to Lord Grabiner's report, ''The Informal Economy'': 
''Defrauding the benefits system means defrauding the poor and preventing us getting the resources to those in need. We would be failing in our obligation to those who need the benefits system if we allowed people to defraud it.''
 We can all agree with that. There is not necessarily a conflict between the interests of honest claimants and bearing down on fraud. 
 I concur with my hon. Friends about the complexity of the system. As my hon. Friend the Member for Arundel and South Downs said, there are several grey areas that need to be resolved. Fraud is fraud and it must be dealt with. 
 I take issue with the Paymaster General's remarks about prosecuting tax credit fraud and filling up the prisons with those who commit it. On the basis of the figures that we have been given, there is some way to go before that happens. The number has increased from three or four this morning to five this afternoon. 
 The Paymaster General said on Second Reading: 
''The compliance regime for the new tax credits will be based on two principles: encouraging people to claim everything to which they are entitled, and providing an effective deterrent to the small minority—it is small—who try to cheat the system.''

Dawn Primarolo: I told the hon. Gentleman that it was small.

James Clappison: That may be so, but given that 1.3 million people claim working families tax credit there may be many cases and a substantial loss of revenue to the Exchequer. If it is anything like the fraud that is prevalent in the rest of the benefits system, although it may be committed by a small minority of all those claiming it will still represent a substantial number who need to be dealt with. We must do everything possible to deter people from doing it.
 In her Second Reading speech, the Paymaster General went on to draw attention to the powers and penalties that the Government have put in place. She said: 
''The Bill contains provisions to deal with non-compliance, including inquiry and information powers to uncover false claims, financial penalties when tax credits are falsely claimed, and powers to investigate and prosecute cases of criminal fraud.''—[Official Report, 10 December 2001; Vol. 376, c. 604.]
 I hope that she does not envisage the possibility that there is a category of non-criminal fraud. All fraud is a crime because it is dishonest, and the powers to prosecute it have not been used satisfactorily. 
 The Inland Revenue's prosecution policy sounds impressive when one goes through all the features that may be present in a certain case, including conspiracy, repeat offences and impersonation of Revenue officials. The Paymaster General mentioned the use of false or forged documents. How many cases of working families tax credit fraud would involve the use of false documents? An applicant who intends to commit fraud will first fill out an application form, which will be a false document if they have put down untrue statements about their circumstances. That may be true in a large number of cases. This is only guesswork, but I suggest that although the Paymaster General says that the provisions are designed to bring about prosecutions in the most serious cases—ones in which there is realistic prospect of conviction, which is the general test for prosecutions—it would be hard to credit the figure of 40 prosecutions during two years in a system that involves 1.3 million people, or the idea 
 that every case that bears such features has been prosecuted.

Mark Hoban: My hon. Friend is making an important point, but I want to draw him back to the numbers in the written answer from the Paymaster General. There were 8,800 cases in which recoveries were made because of the overpayment of tax credits. I should think that many of those involved the offences that the hon. Lady mentioned, such as the impersonation of Inland Revenue officers or the provision of false or forged documentation. However, less than one quarter of 1 per cent. of such cases led to a prosecution. Surely, that indicates that prosecutions are not being pursued vigorously and the Government do not take the matter as seriously as they should.

James Clappison: My hon. Friend is absolutely right. We are worried that insufficient numbers are being prosecuted. The Paymaster General says that we have a select system of prosecutions, but it must be extremely selective to generate such a small number. We find it hard to credit that a vigorous prosecution policy lies behind that. Fraud is a criminal matter and should be treated as a crime.
 On the question of investigations that precede prosecutions, I hope that I can clear up the conflict between myself and the Paymaster General on the figure of 1.5 per cent. As I said, that figure came from the Inland Revenue's annual report, which is the only source of information that we have. It states: 
''During our first full year, our aim was to open inquiries into 1.5 per cent. of applications. The process is supported by a risk-based scorecard, matching of data with other Government Departments and allegations from the public.''.
 It goes on to set out the number of inquiries that have taken place: 
''We found non-compliance in 28 per cent. of cases''.
 From that report, I understood that the system of risk assessment, which the Paymaster General took us through at some length, had generated the figure of 1.5 per cent. She is shaking her head but given that that figure was in the report, can she tell us what proportion of cases were in fact investigated? We would be grateful to know the figure that was generated by the risk-based assessment, whether or not it was 1.5 per cent. 
 It is striking that the risk-based assessment led to a finding of non-compliance in 28 per cent. of cases. That is a high figure. The figure for cases of lower risk may be less than 28 per cent., but that could still generate a substantial figure across the tax credit framework. We need more information on how many claims, as a proportion of cases, have been investigated. 
 We should also like to know about penalties—the Paymaster General did not answer the point that was made by my hon. Friend the Member for Fareham. Given that there are so few prosecutions, and that the only other way in which cases are dealt with is by civil penalty, what proportion of penalties were imposed for fraud and what proportion related to negligence? We know that information systems have not been 
 good in the past so the Government have hardly any record of how much has been generated by penalties. In a parliamentary answer, the hon. Lady said that it was £50 over two months, but the information-keeping system has not been good and we need better information. 
 We also need more information on the ballpark question of how much fraud is in the tax credit system. What is the Government assessment of the amount and extent of fraud? That remains unanswered thus far, so I will study the hon. Lady's remarks carefully. Can she tell me about the outcome of the benchmarking exercise and what will be made public? We do not want anything that would encourage or enable people to commit fraud to be made public, but the Department for Work and Pensions has given its assessment of fraud across the benefit system, and we cannot see how a simple assessment could generate more fraud. As the Government have said in the past in their Green Papers on fraud, it is essential to know how much fraud there is in a system before one sets out to tackle it. We believe that the Government's assessment of the amount of fraud in the tax credit system should be put in the public domain. 
 I made that the starting point of my opening remarks this morning. I reach my concluding point, and the question remains unanswered. I shall study carefully what the Paymaster General has said and reflect on it, but I am unsatisfied. Although I shall not press the amendment to a vote, it raises an important subject that I want to think about carefully. Having done so, I may well want to return to it on Report, but, for today, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 33 ordered to stand part of the Bill.

Clause 34 - Powers in relation to documents

James Clappison: I beg to move amendment No. 44, in page 22, line 8, leave out 'serious'.
 We now come to a different subject—powers to investigate cases—and in view of the Paymaster General's comments in the previous debate, we hope that she will look on the amendment favourably.

Dawn Primarolo: No.

James Clappison: I hope that the hon. Lady will at least listen to my remarks before she responds, because we are trying to help the Government to investigate fraud and remove the self-imposed restrictions on the authorities' ability to investigate fraud.
 The clause gives the Inland Revenue power to obtain evidence in cases of suspected tax fraud and refers to powers already conferred on the board by sections of the Taxes Management Act 1970. The amendment is designed to help the Government and to look at the operation of those powers and the type of cases that they cover. 
 The clause appears to draw a distinction between the conditions necessary for the use of the power to 
 require documents to be produced and the use of the power to enter, search and remove information from premises. There must be suspicion of tax credit fraud for the use of the power to require documents to be produced. However, suspicion of ''serious'' tax credit fraud is needed for the use of the power to enter, search and remove information from premises. The amendment relates to the word ''serious'' and the necessity for that hurdle to be surmounted before the power can be used. 
 The Paymaster General may say that entry on to premises is a more serious step than requiring documents to be produced, but I ask her to consider that all cases of tax credit fraud are serious enough to be dealt with by a sentence of imprisonment. We believe that to raise the threshold to ''serious'' will create many difficulties in practice for those who have to investigate this type of fraud, which as we have heard and as I believe the Paymaster General accepts, is open to collusion, involves complex considerations and many grey areas. It is therefore particularly important that the Inland Revenue has the power to enter, search and remove information from premises, if they are to carry out a thorough investigation of fraud and to prosecute in appropriate cases.

Dawn Primarolo: The clause applies to tax credit fraud and two sets of powers that apply in relation to serious tax fraud. The first set of powers involves the production of documents, and is applied to all tax credit fraud. The second set of powers involves the entry of premises with a warrant to search for documents and applies only in respect of serious tax fraud. The amendment seeks to apply the second set of powers in all cases of tax fraud. I want to explain to members of the Committee why the amendment should be rejected.
 The powers in the clause to enter with warrants are new powers that do not currently exist in relation to working families tax credit. However, when considering the totality of the compliance regime, we felt that they should be added for the most serious cases, such as where organised criminal gangs were engaged in systematic fraud. 
 I do not need to remind the Committee that these are significant powers. I thought carefully before agreeing to give them to the Inland Revenue, because the tax authorities should be given the power to enter premises with a warrant only in extreme cases. The powers will be used only by specially trained officers from the Inland Revenue's special compliance office and never in normal tax credit inquiries. I do not agree with the hon. Member for Hertsmere that they should be. 
 As with any extension of power, there must be a strong justification for the extension that is sought and for Parliament to agree them. All fraud is serious, whether it is tax fraud or tax credit fraud. I wanted to make it clear that a poor tax credit claimant does not have to fear that, if they make a genuine error, there will be a sudden knock at the door and the Revenue special compliance unit will be there. To addition of the word ''serious'' limits the powers to cases involving 
 large amounts of money. Because there are natural limits to an individual's tax credits entitlement, we do not think it right that the power should depend on the seriousness of the fraud against the public purse. 
 However, we need the powers to require the production of documents in such cases, and I have left those in place. That is because there may be factors in an individual claim that are indicative of organised fraud, but the sums of money known to be in question at the time that the documents are required to be produced may not warrant the tag ''serious''. That is the point about prosecuting somebody for a crime that has not yet been committed. Not unreasonably, the courts take a strong line on the matter, and claimants must be in receipt of tax credits, as the hon. Gentleman, who is a barrister, may know. 
 The position is different for search powers, and I make no apology to Parliament for that. It is my job as Paymaster General to ensure that where there are extensions to powers of this type they are fully justified, and they are not justified in respect of tax credits. 
 It is clearly more intrusive to enter someone's premises and search for documents, than it is simply to require them to produce documents. We have been cautious about extending these powers, and I make no apologies for that proportionate approach. The powers allowing entry to premises should apply only if the sums of money involved are such that the Inland Revenue is in a position to demonstrate to a judge that there are reasonable grounds for believing that there is serious tax fraud. It is right that the Inland Revenue should be subject to checks and balances, which it rightly sought. 
 These are not clear-cut decisions, and this is an area in which we should move with caution. We have to balance the reasonable rights of the citizen against the need to tackle those who deliberately set out to cheat the tax credit system in an organised way. We feel that the provisions in clause 34 strike the right balance, and I therefore hope that the hon. Member for Hertsmere will be reassured about the way in which the Bill is framed. If, however, he feels unable to withdraw the amendment, I shall have no hesitation in asking my hon. Friends to oppose it.

James Clappison: I am surprised by the strength of the Paymaster General's response when we were trying to help her. A few moments ago she criticised us for not doing enough, but when we try to help her she takes a trenchant line. Perhaps she has strong views on the subject.
 I shall give the Paymaster General an example of where her attitude will create difficulties in practice. She says that in the case of suspected tax fraud it is sufficient for the Revenue to have the power to require documents to be produced. That is all well and good, but requiring documents to be produced relies on the honesty of the person concerned to produce them. If they do not produce all the documents, there will be little that the Inland Revenue can do about it. Of course, it is the honesty of the person concerned that is in question in the first place. In order to prosecute 
 these cases it is important to have the documents to consider as evidence. 
 The Paymaster General speaks as though the power to enter premises and search for documents is out of the ordinary, and she takes a strong view on it. I shall go away from the debate and study provisions that are made elsewhere in criminal law to generate powers for authorities to enter premises and search for documents because I suspect that those powers are more widely available than she seems to believe. I shall be concerned if I find as a result of my investigations that the Government are placing those who investigate tax credit fraud under a handicap that people such as the police, who investigate other types of fraud or offences in the private sector, are not. 
 We do not want unnecessarily to handicap the authorities in the investigation of tax credit fraud, and we do not want to draw a distinction between tax credit fraud and other types of fraud. I shall examine this carefully and reflect on it, and I may return to it. On that basis, and the need to make progress with the Bill in the relatively modest amount of time that is available given the many important issues that we need to discuss, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 34 ordered to stand part of the Bill. 
 Clause 35 ordered to stand part of the Bill.

Clause 36 - Appeals

Steve Webb: I beg to move amendment No. 73, in page 23, line 8, leave out 'and'.

Nigel Beard: With this it will be convenient to take amendment No. 74, in page 23, line 9, at end insert—
'and— 
 (e) any decision under section 27(1) or section 27(2A).'.

Steve Webb: This is a test to see whether anybody is keeping an eye on what we are up to. Amendment No. 74 seeks to include within the scope of things against which one can appeal the matters covered by clause 27(2)(a). Perceptive Committee members will have noticed that there is no clause 27(2)(a), but had amendment No. 68 been agreed there would have been. The amendment remained on the Amendment Paper because the Chairmen were so confident that amendment No. 68 would be accepted. Let us regard it as a probing amendment.
 Within the scope of decisions that can be appealed against, it would seem from my aided reading that the recovery of overpayments—a decision that an overpayment has been made and that it needs to be repaid—is impossible to appeal against because it is not within the scope of clause 36. The purpose of the amendment was to see whether that was the intention, or whether one can appeal against overpayments. If one cannot appeal, we feel that one ought to be able to. 
 On the subject of appeals and related matters such as penalties, I ask the Minister to reply on record to a 
 question of which I have given her prior notice. On Tuesday, the Financial Secretary responded to one of my questions about cases in which people can face penalties for not supplying information: 
''The initial penalty under the provisions is not at the Revenue's discretion because only the commissioners may impose it.''—[Official Report, Standing Committee A, 22 January 2002; c. 201.]
 I have been advised that that may not be consistent with the rest of the Bill. It seems that penalties for not supplying information are at the board's discretion because it imposes them, and penalties will only get near the commissioners if there is an appeal, which we are discussing in clause 36. 
 It has been put to me that that was probably an inaccurate statement of the position regarding the imposition of penalties, and it would be helpful if the Paymaster General would clarify whether her right hon. Friend meant what he said in that case because the transcripts of what we say are sometimes used in appeals and court cases, and it would be unfortunate if an inaccurate impression had been given. 
 The guts of the amendment are that one should be able to appeal against a decision on an overpayment.

Dawn Primarolo: I can politely refer to this as a consequential amendment to clause 27. The hon. Gentleman withdrew amendment No. 68, and I suppose that he will withdraw today's amendment, but I shall not refer to that because he has been gracious in his comments.
 The hon. Gentleman asked for clarification on the statement made by my right hon. Friend the Financial Secretary in Standing Committee on Tuesday. I shall put this on the record, but it may be helpful if I write to the hon. Gentleman as well given his point about ensuring clarity. My right hon. Friend's statement was not incorrect, and I shall explain why. The discussion was about penalties for failing to provide information, which are set out clause 30(2), and the initial penalty to which he referred is set out in clause 30(2)(a). 
 Paragraph 3(1) to schedule 2 makes it clear that the board must commence proceedings for a penalty to be imposed under clause 30(2)(a). In other words, it must ask the commissioners whether they are prepared to impose such a penalty. Only the commissioners can impose it. The board cannot impose a penalty for continued failure to provide information under clause 30(2)(b) unless, and until, the commission has imposed an initial penalty under clause 30(2)(a). The board's action is consequent on the commissioners' starting the process. As the provision references across the Bill, it would help not only if I put that explanation on the record, but if I wrote to members of the Committee. 
 On appeals and overpayment, I want to double-check that there is not a semantic difference. In an assessment on overpayment, the claimant can appeal against the decision on entitlement from which the overpayment arises, so the difference is one of semantics. It is decisions on entitlement that will produce either the underpayment or the overpayment.

Steve Webb: I understand exactly what the Paymaster General is saying. Let us suppose that, having been given a revised assessment, the board got the sums wrong in taking one entitlement away from the other,
 and that a query arose not about the assessment but about the calculation of the overpayment. Could one appeal against that?

Dawn Primarolo: Yes, because that would be part of the entitlement assessment. I think that the hon. Gentleman is talking not about a case where a mistake on actual entitlement is made, but where the error is produced by bringing together the facts of the entitlement. If the facts are disputed, that is a matter of appeal. Again, perhaps it would be helpful to write to the hon. Gentleman and other members of the Committee on the matter, as I have a feeling that we are talking about technicalities and the meaning of words, rather than the intention behind the provision, which the hon. Gentleman wants to clarify.

Steve Webb: I am grateful for that helpful response to the issues that I raised. I am talking about a circumstance where everyone agrees with the new entitlement and with the board, including up to the point at which a new assessment is made, but where the assessment implies that an overpayment has arisen and the board makes an error in calculating the overpayment. I understand the spirit of the Paymaster General's explanation but I am not absolutely sure that the clause under discussion deals with this issue. I look forward to her written explanation.

Dawn Primarolo: I will look closely at the matter before I reply to the hon. Gentleman. If he has identified what is politely called a lacuna, I shall consider whether it needs to be addressed.

Steve Webb: I am grateful for that explanation and I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 36 ordered to stand part of the Bill.

Clause 37 - Exercise of right of appeal

James Clappison: I beg to move amendment No. 54, in page 23, line 17, at beginning insert—
'Subject to subsection (1A) below'.

Nigel Beard: With this it will be convenient to take the following: amendment No. 55, in page 23, line 19, at end insert—
'(1A) The General Commissioners or the Special Commissioners may allow notice of an appeal under section 36 to be given more than thirty days after the date on which notice of the decision was given if it appears reasonable for them to do so.'.
 No. 56, in page 23, line 29, leave out from 'notice' to end of line 30.

James Clappison: It may be helpful if I point out that I do not propose to press amendment No. 56 in view of the nature of it, and of the fact that some important issues have yet to be debated and we are running seriously short of time. Perhaps we can deal with the amendment in very short order.
 The clause sets out the framework for appeals. Subsection (1) provides that notice of appeal must be given within 30 days of notice of decision. However, 
 the amendment would allow notice of appeal to be given more than 30 days after a decision if it appeared reasonable to the commissioners to do so. In other words, it would give commissioners the discretion to allow appeals to be brought out of time where that appears sensible. The purpose of the amendment is simply to introduce some flexibility into the system and to avoid the risk of injustice, or of a potential appellant's feeling a sense of injustice. We appreciate the desirability of timely appeals, and members of the Committee will observe the requirement of reasonableness that we have placed on bringing an appeal out of time. 
 We should also bear in mind, however, that those who bring such appeals will be ordinary members of the public who are finding their way round the tax credit system. The Bill as drafted appears to make no provision for allowing notice to be given out of time, but the matter can be dealt with in short order if it transpires that there is in fact a way for commissioners to allow an appeal to be brought more than 30 days after a decision. I await the Paymaster General's explanation.

Dawn Primarolo: I hope that I can deal with this quite quickly. The hon. Gentleman is seeking to allow a period of more than 30 days after the notice of decision is issued, but the amendments are not necessary because the points he raises are already covered, and I shall explain why.
 Section 49 of the Taxes Management Act 1970 permits a person to ask the Inland Revenue to accept a late appeal where there is a reasonable excuse for not making it within the time limit. Under that section, the commissioners decide the matter if the Inland Revenue does not agree that the appellant has a reasonable excuse. Section 49 is in part V of the 1970 Act, and will be applied to tax credit appeals by virtue of clause 37(6). Therefore, the rights that the amendments seek to add are already in the Bill and I hope that the hon. Gentleman feels able to withdraw his amendment. 
 I think that the hon. Gentleman said that he does not want to pursue amendment No. 56, so I need not reply to it. I am tempted to do so as he has spoken for longer than I have this afternoon, but I will not because I know that he wants to move on.

James Clappison: I accept the Paymaster General's explanation. There is no reference in the Bill to a discretion as such, but clause 6 does refer to part V of the Taxes Management Act 1970, within which one could doubtless find the relevant provision buried. On that basis, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Steve Webb: I beg to move amendment No. 75, in page 23, line 21, leave out subsections (3) to (7) and insert—
'(3) An appeal under section 36 shall be to an appeal tribunal constituted under Chapter 1 to the Social Security Act 1998, and the provisions of sections 12 to 16 of the Social Security Act 1998 (and Regulations made thereunder) shall apply with like effect to appeals under section 36.'.

Nigel Beard: With this it will be convenient to consider amendment No. 106, in page 23, line 21, leave out from 'be' to end of line 23 and insert—
'to a Social Security Appeal Tribunal'.

Steve Webb: This important amendment seeks to ensure that appeals against decisions on tax credits are made to a body akin to a social security appeal tribunal, rather than to the tax commissioners. Again, we have a strange hybrid—a measure that is not really a tax and not really a benefit—and we must decide which way to go. The Bill proposes that appeals be made to tax commissioners, but the most striking point is that the One Parent Families Association, the National Association of Citizens Advice Bureaux and the Child Poverty Action Group have all, independently, expressed concerns to us about that proposal.
 I would like to set out several reasons why it concerns us. 
 The key issue is the suitability of the tax commissioners as the people to go to. There are various reasons for that, which I will touch on briefly. Clearly, we need some scope for minor review. Clause 18 offers some scope for decisions to be re-examined, but it is not clear how a decision that has been made not to make an award at all can be looked at informally. Clause 18, as I understand it, gives powers to re-examine awards that are not quite the right amount. To some extent that mirrors the new social security appeals process, where something can be informally re-examined, without having to go through the paraphernalia of an appeal. 
 It is not, however, apparent to me how a case can be re-examined when someone has been turned down altogether, and it is clear that something has just been misunderstood or misread, and that minor mistake should be able to be rectified without going through a complex appeals process. Can the Minister clarify how that would happen? Clause 18 does not appear to cover cases in which an award is not in payment. 
 Are the tax commissioners the right people to deal with that category of appeal? The Minister might say that the Government will change the way in which the tax commissioners work to make it more like the way in which the social security appeals process works. However, everything has to be in place by 2003. We already have a social security appeals structure that is dealing with working families tax credit. I should stress that to the Committee. We have a tax credit, appeals against which are currently dealt with quite properly and effectively by the social security appeals system, and a group of people with experience of the client group, the processes and the system. As the saying goes, if something is not broken, why fix it? If we are to use the tax commissioners' route, will we have to reinvent through them all the good things about the social security appeals process that work for that client group? 
 The Minister may have studied the Leggatt report. I know someone who has, and I understand that it raised serious concerns about the general operation and effectiveness of tax tribunals. Much of what it said would be doubly worrying for the client group that we are talking about. One point made is that people are often not represented at them. The evidence is that, with social security appeals, being represented or being 
 present has a big impact on ability to succeed. It might be that it is when people are likely to win that they turn up or have representation, so this might not exactly be cause and effect. But if the custom at tax commissioners' hearings is much less for people to turn up or be represented, there would need to be a change in culture. 
 There is a fundamental difference between the two tribunals. Social security tribunals have what is called an inquisitorial role. They do not just sit back, listen to the client put the case and then judge it. They try to find out what went on, and ask the relevant questions. When an appeal client does not, perhaps, understand the legal technicalities, he might nevertheless have a valid point to make if probed or prodded in the right direction and asked the right questions. Whereas the social security appeals process has that characteristic, it is not apparent that the tax commissioners do. Clearly, we want them to try and get the right answer, not just form a judgment on the basis of the case presented to them. 
 I would assert—although I am open to contradiction on this—that, by and large, the tax commissioners are used to dealing with a completely different client group. They usually deal with the better off, and those with complicated tax affairs. Social security appeal tribunals deal with very different people and circumstances, and they already handle the working families tax credit case load. They already know what they are doing. 
 The next question is which commissioners will people go to? The Bill gives the choice to go to the general commissioners or to the special commissioners. The general commissioners are unpaid volunteers. By contrast with the social security appeals process, if someone chooses one avenue here they can put their case to unpaid volunteers whose decision, if they have ruled on a matter of fact, cannot be appealed against. There are serious worries if folk in the client group that we are talking about put their case to non-specialists, who do not have to be tax experts but who can make rulings. Obviously, that is already part of the tax system, so people might say that it is not a problem because the general commissioners know how the system works. I am not sure, however, that that would be the case with this client group. 
 Alternatively, people can go to the special commissioners, who are salaried, legally qualified experts. But if people get it wrong, lose, and are deemed to have been unreasonable in going to the special commissioners, they could face costs. NACAB are worried that, potentially, not only the applicant, but the advisors could face costs. Such a situation does not arise in the context of social security appeals. 
 There is a whole raft of reasons for the amendment. The Minister might say that the commissioners are going to be reinvented so that they work in a similar way to social security tribunals. That would answer most of the concerns, but why bother? Why not just use the existing structure? If that reinvention is not going to happen, many concerns about the commissioners' route remain valid. The Lord Chancellor's Department is reviewing the role of 
 such tribunals at the moment. It has expressed its reservations about the way in which tax tribunals work. Do we really want to put another large case load down a potentially inappropriate and unsatisfactory route? 
 I stress the widespread concern about the proposals. I understand the Government's desire for neatness, but I wonder if effectiveness might suffer as a result.

Howard Flight: Our amendment No. 106 essentially raises the same point but deals with it in a slightly different and simpler way, by substituting a social security tribunal for general commissioners, but leaving the option to go to the special commissioners. To be brief, the real question is how the Minister proposes to deal with the matter. In a sense, if the whole thing is being transferred to the Revenue, it is somewhat strange not to have an appeals procedure within the Revenue bailiwick. However, as the hon. Member for Northavon pointed out, a precedent has already been established by child tax credit being dealt with by the social security tribunal.
 In short, I think that the Minister realises the issues: suitability, knowledge, experience and the fact that it is essentially benefit-type matters that will be raised. How will the Government address the issues raised?

Dawn Primarolo: I hope that I can reassure the hon. Member for Northavon and that he will agree to withdraw his amendment. At the heart of both amendments is whether those hearing the appeal have the appropriate experience and knowledge to adjudicate on the issues. I absolutely agree that that is a vital point.
 The hon. Gentleman made several other points and I shall deal with them in order. I am, of course, conscious that the Government are undertaking a comprehensive review of the tax appeal system, as Committee members know, following the public consultation exercise. My right hon. and learned Friend the Lord Chancellor, when he launched the consultation, paid tribute to the effective and committed way in which the general commissioners of income tax discharged their public duties and the personal and professional competence that they bring to their work. 
 The Lord Chancellor also made it clear that he believed it possible to find significant improvements in the current system. Another factor of the review was the need to ensure that we have an effective tax appeal tribunal to hear tax credit appeals. We have discussed the new tax credits and the fact that they will work in a very different way, and it is important that the tax commissioners have sufficient expertise to handle that. 
 On the ability and expertise of the general commissioners to deal with issues other than tax, I point out that they deal with many issues. Since 1999, the commissioners have successfully taken on the responsibility of national insurance appeals, statutory maternity pay appeals and statutory sick pay appeals, which were all previously dealt with in the social security system. The commissioners received 
 additional training to enable them to do that and will have similar training in connection with tax credits. Therefore, the Government are correct in wanting the appeals to go to the commissioners. 
 The hon. Member for Northavon also asked whether the commissioners were inquisitorial. Yes, they are inquisitorial, but not adversarial. They can and do seek clarification from all parties. He also asked—

Steve Webb: What do the Government plan to do?

Dawn Primarolo: I am answering all the other points and will then come back to the question of what happens now. The hon. Gentleman may want to intervene at that point.
 The hon. Gentleman also asked whether one could appeal the general commissioners on the question of fact. It is possible to challenge their ruling if their findings are so at variance with the facts that it is unreasonable. That is the test. 
 Before I turn to the facts, I want to deal with basic errors and disputes in the appeal and whether the Inland Revenue would be able to correct mistakes. Basic errors and disputes will not be dealt with only at appeal. A misunderstanding may have arisen of the new tax credits and the way in which the Inland Revenue works. Under statute, the Inland Revenue has a well-established care and management function in tax credits and national insurance, which gives it a sensible amount of management discretion. That is the appropriate use of the word ''discretion''. It does not give the Inland Revenue carte blanche, but it gives it the ability to correct in a responsible way simple, straightforward mistakes. The Inland Revenue's decisions about tax credits during the year will be provisional, as is set out in clauses 14 and 16. It would be pointless to have revisions of a provisional decision. 
 Clause 20 allows decisions that are subject to official error to be revised in the claimant's favour without the need for an appeal. Even if there is an appeal, that does not mean that the claimant will have to go to the commissioners if they are in agreement with the Inland Revenue about the facts. Part V of the Taxes Management Act, which is applied to tax credit appeals by subsection (6), allows such appeals to be settled by agreement. 
 To return to the heart of the issue, I had discussions again this morning with my colleagues in the Lord Chancellor's Department. While we have a desire, and it makes sense, to ensure that the tax commissioners hear the appeals, we also recognise that we will need to ensure that they have the appropriate experience to deal with them. The hope is that by 2003 that should be the case, and working families tax credit cases, as the hon. Gentleman pointed out, will go to the social security tribunals. If for some unforeseen reason that principle could not be delivered, we would ensure that the appeals were heard in a suitable way for the type of claim by adjudicators with the appropriate training and experience. 
 All that depends on the Lord Chancellor's review and recommendations being in place by 2003. I am not 
 aware that I do not have that latitude under the Bill, but if the principle were not delivered and the Bill did not give me the latitude, I would need to return to the matter. 
 I understand and accept the principles advanced by the hon. Member for Northavon about the appropriateness of those who hear the appeals, but I do not agree that there is a problem about making the appeals relevant to tax commissioners, as long as they can hear the appeals, and that is subject to the review. 
 I hope that I have given the hon. Gentleman a strong enough indication that that important point will not be overlooked and that he will therefore seek to withdraw his amendment. It is not necessary, because we shall ensure that the tax commissioners are suitably qualified.

Steve Webb: I am grateful to the Minister for going some way to respond to my points. When I sought to intervene earlier on the issue of inquisitorial, perhaps I did not explain clearly what I meant. Will they ask questions? Fine. Will they be proactive? I am glad that the Paymaster General nods in response to that. Being inquisitorial is not just about asking questions and checking; it is about thinking, ''Perhaps there is something that the claimant has not said which, if they had said or had been asked about, would have given us a more complete picture.'' It is a question of going out of their way to find those things instead of simply sitting back and saying—

Dawn Primarolo: My understanding is that the answer to the hon. Gentleman's question is yes, the commissioners would do that. He describes it as going out of their way. They will acquaint themselves with the facts to make sure that the case being presented by the claimant covers all the issues. That is what goes on at the moment and we have no desire to curtail that. There would be no reason to.

Steve Webb: That is helpful. The Paymaster General said that that is what goes on at the moment, but she can only mean that that is what goes on at the moment in social security appeal tribunals that deal with working families tax credit cases. It is not what goes on in tax commissioners' cases, and they will need a culture shift. Given that the Lord Chancellor is reflecting on all this and will then need to put in place a training process, I am concerned about it.
 I am grateful to the Paymaster General for her hint that, should there be any delay, other mechanisms, such as presumably the present system or something similar, would need to be in place to deal with those cases. 
 The Paymaster General did not address the issue that people will have to choose which set of commissioners to go to. It is not clear to me how, again, the unguided claimant of working families tax credit in a low-paid job, who is perhaps not very comfortable with form-filling and all the rest of it, decides whether to go to the general tax commissioners or the special tax commissioners and appreciates the consequences of doing either. I find that problematic. 
 The Paymaster General did not address the question of costs, which was raised with me by 
 NACAB—that those who go to the special commissioners may make themselves liable for costs. That worries me. 
 The fundamental point is this: if a system works and fits the group, why are we changing it? The Minister is saying ''We will do our best to change the other system, which is not meant for these people, and train those who are dealing with it to make it look more like the one we have that works.'' If the Government can live with the paradox of having tax credits assessed by social security appeal tribunals now and they are still called tax credits, what has changed? Why is it any different? A little streamlining may be taking place, but we are simply merging bits of the benefit system in as well. 
 Therefore, I remain unhappy about the clause. I am struck by the unanimity of those who deal with the client group that they are not happy that the tax commissioners are to deal with these matters or with the whole process and culture. On that basis I shall seek the Committee's opinion on the amendment. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 7, Noes 8.

Question accordingly negatived.

Steve Webb: On a point of order, Mr. Beard. As I am somewhat inexperienced in the finer points of Committee procedure, could you clarify the rules governing the time that you allow for hon. Members to return to the Room for a Division.

Nigel Beard: The general rule is to allow two minutes and we were within that time.
 Clause 37 ordered to stand part of the Bill.

Clause 38 - Persons subject to immigration control

Karen Buck: I beg to move amendment No. 88, in page 24, line 5, leave out
', child tax credit or working tax credit (or both),' and insert 'working tax credit (but such regulations shall not exclude entitlement to persons subject to immigration control who are entitled to take up or be engaged in employment in the United Kingdom)'.

Nigel Beard: With this it will be convenient to take amendment No. 89, in schedule 4, page 52, line 1, leave out from 'section' to end of line 3 and insert
'115(1), the words ''(i) child benefit'' are omitted.'.

Karen Buck: I shall be brief. I should like my hon. Friend the Paymaster General to clarify her thinking on the implications of the new tax credits for people with immigration status. As an inner-city Member of
 Parliament, I know that levels of poverty among black and ethnic minority families are significantly greater than among white families; there are an estimated three times as many Pakistani and Bangladeshi families in households of below-average income as white families. That is an important context for the discussion.
 The amendment seeks to make immigration status irrelevant for entitlement to working tax credit and child tax credit, and a return to the 1996 status when child benefit was not dependent on the immigration status of the claimant. Those people who are entitled to work in this country, have a tax allowance and are protected by other Government legislation such as the minimum wage—I stress that I am not talking about people whose immigration status prevents them from taking employment in this country—should be able to draw upon the working tax credit and child tax credit. In some cases, such people will already be taxpayers and will have been making contributions through national insurance for many years before they fall into low-income status because of a change in situation or employment. It is by no means true that they will not have earned their entitlement. We are not talking about visitors to the country who will be prevented from drawing on benefits by the habitual residence test. 
 Perhaps, more importantly, a significant proportion of people who are prevented from drawing on working families tax credit and child benefit are families that are bringing up children who will remain in this country. A particularly important group are foreign spouses and their children, who come to join someone with settled status or British citizenship. They are not allowed to claim children's benefits and could live, for a significant period, on a single person's benefit. Such people, and particularly foreign spouses, will receive a decision on indefinite leave to remain possibly after a year or two, and during that time their children will have lived in extreme poverty. We have as much of an investment to make in those children as in any others. Our commitment to tackle child poverty in all its manifestations should apply to the children of people who do not yet have a settled immigration status that entitles them to draw on such benefits. They deserve the right to be lifted out of poverty as much as anyone else.

Howard Flight: This is an important amendment. I raised the same subject when we focused on European Union nationals. Other than EU nationals, some 600,000 people from the Commonwealth and other parts of the world have the right to work here. I also asked about it on Second Reading, and the Paymaster General still has not yet clarified the right or otherwise of such people to qualify for tax credits under clause 38. I hope that she will now do so.

Dawn Primarolo: I am grateful to my hon. Friend for tabling the amendments, which seek to amend the Home Office legislation on the immigration status of certain people in this country. The Bill follows current practice with regard to Home Office requirements. Some people have a status whereby they are subject to immigration controls in the sense that they have
 secured agreement to enter the UK for employment purposes, but on the condition that they do not have recourse to public funds. They are therefore excluded from working families tax credit. Clearly people who are here illegally are not subject to immigration controls. Bearing in mind that my right hon. Friend the Home Secretary is undertaking a review of asylum, instead of writing the current position into the Bill I have allowed that it should go into regulations. Consequently, if the review produces changes to the requirements placed on those who are subject to immigration and asylum rules we will be able to react strongly.
 I shall give an example of an area of concern that I hope to address in the regulations. A mother and her children are UK residents, hold UK passports and could by no stretch of the imagination be subject to immigration controls. They may be in receipt of working families tax credit or the new tax credit. A partner who is subject to immigration controls joins the household. What then happens to the family? Why should they come within immigration controls? The solution that I am considering—although I shall have to take further advice from colleagues in the Home Office—is to protect the position of the mother and children because had she remained as a single parent household her claim would have proceeded. However, that is a matter for regulations. 
 I hope that my hon. Friend accepts that I am trying to be as sensitive as I can to the issues without venturing into policy that is not within my remit. I think that there have been some bad experiences around the type of scenario that I have described, which I hope that I will be able to address in regulations. I hope that my hon. Friend can accept my assurances and withdraw her amendment. Unfortunately, if she does not, I shall have to ask her to vote against it with the rest of our hon. Friends.

Karen Buck: I am grateful to my hon. Friend the Minister for her reassurance. This was very much a probing amendment, and I accept that we will have to look to the Home Secretary to find out whether the new provisions on asylum and immigration will allow us a little more latitude. I am especially grateful to her for drawing out a sub-group of people with particular difficulties.
 I had a number of different illustrations, but shall be brief. I am grateful to the Child Poverty Action Group and I have been making representations on that point. We do need to address the matter in regulations, and there is some potential incompatibility between the tax credit legislation and section 115 of the 1999 Act. Depending on the time scale between this Bill being enacted and any new legislation being introduced, there will be a need to examine that incompatibility. I am grateful that the Minister is, in principle, sympathetic to the issue and on that basis I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 38 ordered to stand part of the Bill.

Clause 39 - Polygamous marriages

Question proposed, That the clause stand part of the Bill.

Peter Luff: Sometimes one makes speeches in this place because one is genuinely angry about or genuinely supportive of something. Sometimes, but all too rarely, one does so out of sheer curiosity. This is one of those occasions.
 The clause is about polygamous marriages. I seem to have upset the Minister, which was no part of my intention. I rise to make no point at all. The notes on clauses say: 
''Exceptionally, those claiming tax credits may be parties to polygamous marriages.''
 Why are we making that exception? My party and I—and I am sure you, too, Mr. Beard—are great supporters of marriage as an institution, but I tend to the view that one wife or husband is enough.

Hugo Swire: At the same time.

Peter Luff: At the same time, as my hon. Friend says from a sedentary position. One can have too much of a good thing.
 I would like to know why we are making the exception. It is also the last opportunity in this Bill for me to ask why we are relying on regulation-making powers under the negative procedure? I look forward to the Minister's comments.

Dawn Primarolo: I do not think that I am going to get away with saying that the Conservative Government, which the hon. Gentleman supported, introduced the provisions into social security legislation and that it is now necessary to carry them forward because the Tax Credits Bill is not reliant on or cross-referenced to social security legislation. However, such a provision was and is part of income support and family credit.
 I would like to quit while I am ahead and say that the previous Government thought this up, but I do not think that I can leave it at that. It is provided for in regulations in this way because that is how the previous Government did it. I know that I am picking and choosing, but it seemed right to follow the recommendations of the hon. Member for Northavon and on this occasion I decided that if something was not broken, we should not mend it. 
 Speaking seriously, the clause allows the new tax credits to cater for the rare cases—I stress that they are very rare—in which the claimants are party to a polygamous marriage. The practice of making provision in United Kingdom law to recognise polygamous marriages legally entered into abroad is long established in the UK. I assure the hon. Gentleman that I have checked that to make sure—

Howard Flight: The hon. Lady would not want to make it obligatory, would she?

Dawn Primarolo: No, I agree. One husband is quite enough.
 A polygamous marriage is recognised as valid by the courts if it was contracted in a country that permits 
 polygamy and the parties to the marriage were subject to the law of that country at the time when they were married. This is a principle of international law and was written into the UK statute book in 1995—thank goodness—by the Private International Law (Miscellaneous Provisions) Act. Polygamy is recognised for the purposes of income support, jobseeker's allowance, working families tax credit and disabled person's tax credit and follows the precedent that has been set. 
 I was informed that, if the provision was not included in the Bill, the UK would risk being in breach of the European convention on human rights, in which case, my right hon. Friend the Chancellor would have been unable to sign the compatibility statement. 
 I have probably said enough to assure the Committee that this is a necessary provision. It is extremely rare and is a sensitive issue. I hope that the hon. Gentleman will agree to allow us to move on, although I am sure that he could ask the Library to do some interesting research for him on this aspect of UK law.

Steve Webb: I cannot resist pointing out to the hon. Member for Mid-Worcestershire (Mr. Luff) that his noble Friends in another place considering the State Pension Credit Bill have moved an amendment relating to polyandry, and that he may have been guilty of glossing over the issue of many husbands. The clause covers only many wives—polygamy—whereas polyandry relates to many husbands. It is clearly a matter of some concern to the hon. Gentleman's party.

Peter Luff: I am in all kinds of dilemmas, because I am now being accused of sexism. I imagined that the term ''polygamous marriage'' referred to husbands and wives, but I am in some difficulty now.

Nigel Beard: Order. I think that I can help the hon. Gentleman. The clause refers to polygamy, so it would be preferable to stay on that subject.

Peter Luff: That is true. You are entirely right, Mr. Beard, and I think that the hon. Member for Northavon also makes an important point that the Government should reflect on before the Bill is considered on Report. Let the record show that the Minister indicated dissent.
 On the basis that any member of the Committee who votes that the clause stand part of the Bill does not endorse polygamy or polyandry, I would not wish to force the Paymaster General to say any more and I am grateful to her for her remarks. 
 Question put and agreed to. 
 Clause 39 ordered to stand part of the Bill. 
 Clauses 40 to 43 ordered to stand part of the Bill.

Schedule 3 - Tax credits: consequential amendments

Steve Webb: I beg to move amendment No. 76, in page 46, line 4, at end insert—
'28A In sections 150 and 152 of the Social Security Administration Act 1992, replace at all places where they appear references to the ''Secretary of State'' with ''Secretary of State or 
Treasury'', and in section 150(1) of the same Act after sub-paragraph (k) but before the words ''in order to determine'' insert a sub-paragraph (l)— 
 ''(l) arising under the Tax Credits Act 2002 (or regulations made thereunder),''.'.

Nigel Beard: With this we may take new clause 6—Review and alteration of rates of tax credits—
'Section 150 of the Social Security Administration Act 1992 shall apply with like effect to tax credits and paragraph 28A of Schedule 3 to this Act shall amend the said section 150 accordingly.'.

Steve Webb: Returning to sobriety, this relatively straightforward amendment and new clause would insert in the Bill provision for annual uprating, presumably in line with prices at least, of the various thresholds that will apply to tax credits legislation.
 Clearly the Paymaster General could legitimately point out that since the Government came to office they have done far more than price index many of the elements of sport for children. That is laudable and to be applauded. However, we are legislating not merely for benign Ministers such as the hon. Lady but for subsequent elected despots, whom we might face across the Chamber or indeed form a Government with. [Laughter.] The issue is whether the Government want to place on record their intention to index all aspects of the tax credit regime. 
 There is a serious point to be made here. One assumes that in the normal run tax credits will probably be uprated in general, but there are detailed nooks and crannies in these systems that often do not get uprated. In the social security system, one thinks of capital limits, which sometimes remain the same year on year. Although an individual decision not to uprate does not matter a great deal, the cumulative effect can sometimes be quite serious. 
 Although we would be grateful for an assurance from the Paymaster General that the Government's intention is benign, it would be nice to tie their hands to some extent by including such a provision in the Bill. It would require them to uprate not only the headline parts of the system—we assume that they would fear the consequences of not doing that—but the obscure parts that no one really notices, but which could impact on individual claimants. The effect of failing to uprate various parts of the benefits system is often similar. 
 As I understand it, the Bill does not make such provision, and we therefore hope that the Paymaster General will accept the new clause.

Dawn Primarolo: As the hon. Gentleman is concerned mainly with the principle behind his amendment, I hope that he will not object if I avoid discussing its technicalities. That said, those technicalities—let alone what I am about to say—are sufficient to prevent its inclusion in the Bill, so we will have to vote against it. As he said, the amendment is chiefly concerned with the legislation's mechanisms and the principle of uprating, so perhaps I should stick with that point.
 We would need to look carefully before leaping in the direction in which the hon. Gentleman suggests. The Bill is designed to strike a careful balance between transparency and flexibility. Some hon. Members suggested that it is little more than a framework, but that accusation is not justified. In constructing the Bill, we have been careful to make clear the intended shape of the credits. The elements that we intend to create are set out in clauses 8 to 12, and I hope that hon. Members agree that I have been forthcoming about the Government's intentions during our deliberations. 
 At the same time, it is important that the Bill allow scope for the credits' structure to develop as our understanding of the needs of families and of working households develops, and as patterns of work and family life change. If we include an uprating provision in the Bill, the risk is that we might inadvertently cause the credits' structure to ossify, when in fact we want more latitude. Ossification could indeed occur if there were a presupposition that, once introduced, elements must always persist, even if they become redundant over time. In that sense, uprating would lock us in. 
 The hon. Gentleman will probably say, ''Let's have a little uprating, which can always be adjusted.'' Of course, the process of setting the new tax credit rates will be highly transparent, even without a provision such as section 150 of the Social Security Administration Act 1992. As hon. Members will be only too well aware, the rates and thresholds are the subject of the Chancellor's Budget statement, and I am sure that they will not escape the enormous scrutiny to which the Budget process is already subject. 
 Having said that, I am happy to acknowledge that the hon. Gentleman's arguments in favour of an uprating provision are not without force. I should like the opportunity further to reflect on the points that he has made before deciding whether it would be appropriate for the Government to introduce such an amendment. As this is such an important issue, I hope that he will forgive me for asking for a little more time, and I hope, too, that I have been generous enough to tempt him to withdraw his amendment and to allow me to consider the matter further.

Steve Webb: I always find the hon. Lady tempting in the extreme.
 The Paymaster General has given me quite a heartening response, which goes some of the way towards addressing my concerns about parts of the system not being indexed. I am concerned, however, that were no Government amendment along these lines introduced, there would in effect be a licence to cut parts. She is essentially saying that things might change and that the Government might decide that they have different priorities and therefore want to cut parts. If there were no intention ever to cut anything, having their hands tied over uprating would not be a problem, because it was always going to happen. If the Paymaster General introduced no amendment at a subsequent stage, that would suggest that the Government had in mind keeping open the option to cut parts of the system. Obviously, they do not have that intention at present as the system is new, but claimants might be slightly concerned were no such amendment introduced. 
 I mention some precedents. One is the Social Security Administration Act mentioned in the amendment. It is far from unprecedented to include in legislation that parts of the income maintenance system shall be indexed annually. Governments do not say that they do not guarantee to index pensions every year because that would tie their hands. They have statutory duties to index things. It seems slightly odd for them to argue that they do not want a statutory indexing provision because it would tie their hands. The Government do such things in very similar circumstances. 
 Another precedent, perhaps closer to the tax system, is what is known as the Rooker-Wise-Lawson amendment, which requires statutory indexation of personal tax allowances unless the relevant Bill overrides it. The assumption is that it is a positive, high-profile action not to index, rather than something that just goes through on the nod because there is no requirement to index. I had thought that I would seek to press the amendment until, at the end of her remarks, the Paymaster General said that she has some sympathy with where the amendment is coming from. Heartened by that, and looking forward to what she comes up with, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Steve Webb: I beg to move amendment No. 118, in page 46, line 4, at end insert—
'28B In sections 170 and 172174 (except section 172(5)) of the Social Security Administration Act 1992 (c.5), at all places where they appear replace references to the 'Secretary of State' and 'his functions' with 'Secretary of State or Treasury' and 'their functions' respectively, and in section 170(5) of the same Act after sub-paragraph (b) add: 
 ''(bb) the provisions of the Tax Credits Act 2002''.'
.

Nigel Beard: With this, is will be convenient to take new clause 12—Advisory bodies and consultation—
''The Social Security Advisory Committee (constituted under section 9 of the Social Security Act 1980 and Part XIII of the Social Security Administration Act 1992) and its functions shall apply to tax credits and paragraph 28B of Schedule 3 to this Act shall apply to Part XIII of the Social Security Administration Act 1992 accordingly.''.

Steve Webb: The amendment and the new clause are about the scrutiny, and to some extent the pre-legislative scrutiny, of the regulations that will govern tax credits. Quite a profound point is involved here. In recent years, the blurring of the distinction between social security, tax and tax credits has meant that some of the established mechanisms for ensuring that the system works properly—in the interests both of the Government's aims and of claimants—have started to go a bit fuzzy round the edges, for want of a better phrase.
 A specific example is that social security changes are subject to the expert scrutiny of the Social Security Advisory Committee. The people on that independent body have a wide range of backgrounds and experiences. The danger is that although the tax credit legislation has many of the properties of social security legislation in terms of the client group and the sorts of issues raised, which are meat and drink, bread 
 and butter to the Social Security Advisory Committee, as far as I can see, there is no provision in the Bill for regulations that will allow the tax credit system to be scrutinised independently. The actual act of scrutiny might not change the regulation, but the knowledge that scrutiny is going to happen might mean that the regulation is better before it becomes public. If regulations are going be pored over by experts, it might ensure that they are more rigorous and better thought through before they are publicly introduced. 
 We are already some way down a dangerous track, and have established a system whereby tax credits, which are increasingly important, are not as well scrutinised as we would wish. The Bill, which increases the scope of tax credits, appears to take more things outside the domain of the SSAC. 
 There is a related issue: whether and how tax credit legislation and policy will be scrutinised in Parliament. Will that be done by the Work and Pensions Committee or by the Treasury Sub-Committee? It will probably not be the Work and Pensions Committee as these are now all matters for the Inland Revenue, but the Treasury Sub-Committee has not, historically, got into that role and got used to that client group. 
 The purpose of the amendment is to get some proper scrutiny. I hope that the Minister will be sympathetic to what we seek to achieve, and will be as tempting as she was last time.

Dawn Primarolo: I shall do my best to help the hon. Gentleman, and explain why I think that his amendment and new clause are unnecessary. I do, however, agree with the points that he is making, and we are trying to proceed on the issues contained in his proposals.
 The role of the Social Security Advisory Committee is set out in part XIII of the Social Security Administration Act 1992. That role is to advise the Secretary of State in connection with carrying out his functions. The amendment and new clause seek to widen the SSAC's remit, giving it an advisory role in relation to the Treasury's functions under the Bill. I do not think that it needs to be concerned with everything there. 
 I understand the hon. Gentleman's concern that we should ensure that the experience and knowledge of the committee, in the area of social policy, can inform the development of the tax credits system and that proposals for draft legislation made under the Bill are subject to the appropriate scrutiny and consultation. I wholeheartedly agree with that sentiment. 
 When the working families tax credit and disabled person's tax credit were introduced and, similarly, when the responsibility for national insurance contributions was transferred to the Inland Revenue, I was anxious to ensure that that consultation was happening. I asked my officials to make sure that the committee was shown all relevant regulations in draft so that we benefited from its members' expertise. That practice has continued, and I take the opportunity to place on record my appreciation of the contribution that those people make. 
 The SSAC was also consulted about the proposed introduction of the two new tax credits. Officials from the Inland Revenue, the Treasury and the Department for Work and Pensions met the committee to discuss the Government's proposals. My officials are already in touch with the committee to ensure that arrangements are made for the dialogue to continue and progress. 
 I hope that the hon. Gentleman and I are—I do not think that I can say this—as one on this issue. I have embarrassed him now. However, I do not think that the appropriate way forward is to amend the Bill. I agree that the provision must be made. In the area of tax contributions and tax credits, the Government's function, and what is important to the committee, is the new tax credit system, including the making of new regulations for it. 
 The board of the Inland Revenue is a statutory body, with duties set out under the Inland Revenue Regulation Act 1890. There are clear lines of accountability here, and it would be messy and difficult to put things in the way that the hon. Gentleman has suggested. The board is answerable to Treasury Ministers on the matter. I sincerely hope that the hon. Gentleman will accept that I agree with his points about the SSAC. We intend to ensure that it will continue to be involved, consulted and referred to, not through amendments to the Bill but by direct agreement between the relevant Departments. I hope that, on that basis, he will withdraw the amendment.

Steve Webb: I am grateful that the Paymaster General accepts the spirit of what we seek to achieve in the amendment. I have one reservation about how far the process that she described meets those concerns. As far as I can see, it is largely or entirely a private process. I did not know that those meetings had happened, although perhaps I should have done. I do not know if there are minutes of those meetings. I believe that the SSAC probably has the power to call witnesses when it holds inquiries into regulations, but it has probably not done much of that in its discussions with the Treasury.

Dawn Primarolo: Treasury officials have gone to the SSAC on those matters. I shall examine what the hon. Gentleman says about whether those meetings are known about, but those are not issues of principle. We are prepared that there should be such arrangements.

Steve Webb: I hope that that scrutiny will be open, accountable and publicly reported. Grateful for the Paymaster General's assurances, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 93, in page 46, line 43, after ''of'' insert— 
''Part 1 of''.—[Dawn Primarolo.]
 It being Five o'clock, The Chairman proceeded, pursuant to Sessional Order D [28 June 2001] and the Order of the Committee [15 January], as amended by the Order of the Committee [22 January] to put forthwith the Questions necessary to dispose of the business to be concluded at that time. 
 Schedule 3, as amended, agreed to. 
 Question put, That clauses 44 to 47, schedule 4, clauses 48 to 55, schedule 5, clause 56, schedule 6 and clauses 57 to 65 stand part of the Bill:—
The Committee divided: Ayes 8, Noes 6.

Question accordingly agreed to. 
 Bill, as amended, to be reported. 
 Committee rose at three minutes past Five o'clock.